Tax wrangling creates uncertainty about paychecks

With Congress in a muddle over tax rates for next year, uncertainty over how much to withhold from workers' pay has begun to worry the nation's payroll administrators.

Normally, the Treasury Department issues information on how much to take out of next years paychecks by mid-November, but this year the debate over how much to extend the Bush tax cuts seems unlikely to be resolved by that time, and could drag into December or beyond.

The longer it drags on, the more likely it will complicate the processing of millions of paychecks in January. It can take as long as five weeks for some companies to make the adjustments under the new tables, payroll administrators said.

"Withholding is so personal to people," said Michael O'Toole, the American Payroll Association's director of government relations and publications. "People are apprehensive about whether Congress will act on time for them to produce accurate payrolls at the beginning of the year."

A Treasury representative declined to say how the Treasury would handle the situation, should it drag out.

"We have a lot of flexibility on the release of the withholding tables," the representative said. "The president and [Treasury Secretary Timothy F.] Geithner are confident Congress will vote to approve middle-class tax relief before the end of the year."

One of the problems is that if Treasury based the withholding tables on current law, under which the Bush tax cuts would expire, millions of low- and middle-income taxpayers would see significant tax increases.

For example, a family with two children and income of $40,000 could see the amount withheld rise by as much as $165 monthly, according to calculations by Roberton Williams of the Tax Policy Center.

Many think that Congress will act to prevent that kind of rise.

"From the point of view of the economy, I don't think anyone thinks there should be a middle-class tax increase," said Eric Toder of the Tax Policy Center. "There's going to be a lot of confusion for taxpayers that results because Congress did not act in a timely manner, even if they were to act in November."

So even as Congress and the administration say they are confident that the tax legislation is forthcoming, people charged with calculating the size of the bite to take out of paychecks are increasingly nervous.

"People are starting to say, 'What are we going to do?' " said Dennis Danilewicz, who is in charge of payroll at the NYU Langone Medical Center and a former president of the Payroll Association. "Everyone is kind of at Congress's mercy."